Does Risk Aversion Accelerate Optimal Forest Rotation Under Uncertainty?

18 Pages Posted: 22 Oct 2004

See all articles by Erkki Koskela

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; IZA Institute of Labor Economics

Luis Hernan Radomiro Alvarez

University of Turku - Turku School of Economics

Date Written: September 2004

Abstract

We use a Wicksellian single rotation framework to analyze the impact of the intertemporally fluctuating and stochastic mean-reverting interest rate process on the optimal harvesting threshold and thereby the expected length of the rotation period, when forest value is also stochastic following geometric Brownian motion and landowners are risk-averse. We provide an explicit solution for the two-dimensional path-dependent rotation problem and demonstrate that higher interest rate volatility increases, while higher risk aversion decreases the optimal harvesting threshold. Moreover, under risk aversion increased forest value volatility decreases the optimal harvesting threshold, while it has no effect under risk neutrality. Numerical illustrations indicate that higher interest rate volatility will raise the expected rotation period at an increasing rate, while higher forest value volatility will decrease its sensitivity under risk aversion.

Keywords: forest rotation, risk aversion, stochastic interest rates, optimal stopping

JEL Classification: C61, G31, Q23

Suggested Citation

Koskela, Erkki and Radomiro Alvarez E., Luis Hernan, Does Risk Aversion Accelerate Optimal Forest Rotation Under Uncertainty? (September 2004). CESifo Working Paper Series No. 1285. Available at SSRN: https://ssrn.com/abstract=608942

Erkki Koskela (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland
+358 9 191 8894 (Phone)
+358 9 191 8877 (Fax)

HOME PAGE: http://www.cesifo.de/servlet/page?_pageid=56&_dad=portal30&_schema=PORTAL30&pa_id=7298

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Bank of Finland - Research Department ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Luis Hernan Radomiro Alvarez E.

University of Turku - Turku School of Economics ( email )

Rehtorinpellonkat 3
FIN-20500 Turku
Finland

Register to save articles to
your library

Register

Paper statistics

Downloads
90
Abstract Views
1,170
rank
282,311
PlumX Metrics